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A NEW ERA FOR Affordable Housing

The competition for affordable housing tax credits and related incentives is as intense as ever among developers, even as federal and state budgets tighten. To gain an advantage, project sponsors are searching for ways to stand apart from the mainstream: The gray, boxy apartment towers of yesteryear are giving way to eye-catching mixed-use facilities.

The savviest tax-credit applicants have realized that they need to do more than just build apartments. “We now understand that we should not be building stand-alone housing projects, but instead should be creating neighborhoods,” says Judith Siegel, president of Baltimore-based Landex Corp., which has been developing affordable housing for two decades.

The company's latest planned project is St. James Estates, a 200-unit apartment complex in downtown Newark that will eventually include some 15,000 sq. ft. of retail space, enough for a small bank and a drug store.

“We never put commercial space into an affordable housing project in the past, but now it's something that we're considering for every project we do,” Siegel says. The inclusion of commercial space in an affordable housing project that is located in a deteriorating neighborhood may stimulate more development nearby, Siegel believes. It doesn't hurt, she adds, that the retail portion is offered to tenants at market rates, providing an extra profit opportunity for the developer.

How many affordable housing projects are following the current Landex model? No statistics are available on this mixed-use approach, but there is a growing consensus among industry experts that poor people don't deserve substandard or even uninspired-looking housing. “Developers are recognizing that individuals living in affordable housing deserve the same construction accoutrements that people who live in market-rate housing enjoy,” says Jana Cohan Blackman, an attorney with the Chicago firm of Sonnenschein Nath & Rosenthal, whose practice is devoted to affordable housing.

For those developers who haven't signed on yet to the new look, Blackman adds, subsidies allocated by state and local agencies may spur them to action. “There is keen competition for the assistance available from allocation agencies, and developers are realizing that to present a winning proposal they need to make their projects better,” she explains. In sum, plain vanilla construction isn't likely to win public support.

Private-sector investors are playing a role, too, notes Richard Goldstein, an attorney with Nixon Peabody LLP in Washington, D.C. “As the private sector and corporate investors have gotten involved in affordable housing, they've demanded better quality product,” Goldstein explains. “After all, they want to protect their investments. They don't want a bad affordable housing project to get run down or shabby and come back to haunt them,” he adds.

Shortage of Affordable Housing

The U.S. Department of Housing and Urban Development reports that almost 1 million affordable-rent apartments were taken out of circulation over the past decade as old buildings were torn down or owners opted out of low-income programs. The Washington, D.C.-based National Council of State Housing Agencies has mounted a campaign urging Congress to tighten rules that allow apartment owners to exit the affordable housing program.

“We aren't creating enough new affordable housing each year to meet the demand in the market,” says Jay Helfrich, executive vice president of New York-based American Property Financing Inc., a mortgage lender specializing in multifamily affordable housing that loaned $800 million to the sector last year. “In many places, housing costs have risen faster than individuals' incomes, which is where the demand is created.”

Many developers have become quite adept at applying for subsidies, credits and grants. But they often end up disappointed. Helfrich estimates that in most states there is three to four times the demand for public money to back affordable housing as there is money available.

“We've had more applications for development than tax credits available since the mid-1990s,” says David Cardwell, vice president of finance for the National Multi Housing Council in Washington, D.C. “The competition has grown despite the fact that returns aren't as good as they once were for investors.”

Almost all low-income housing today depends on federal tax credits that were created by the 1986 Tax Act. Construction peaked in 1994, when 117,100 apartment units were built with credits, according to the National Council of State Housing Agencies. The credits are administered by the states, which receive an annual allocation from the federal government based on the state's population. Developers then apply to the state housing agencies to receive credits.

The problem was that the program, which is based on population and administered by the states, capped the tax credits at $1.25 per capita, with no inflation index. As construction costs mounted, the affordable housing totals went into decline, hitting 66,900 in 2000, according to the National Council of State Housing Agencies.

In 2001, Congress boosted the allotment to $1.75 per capita, with the provision that the formula would rise each year with inflation. Construction of new units rose to 75,000 in 2001. Some catch-up is in order, for the ranks of affordable housing have been shrinking for years.

Stepping Outside the Box

To make their projects more compelling, developers are adding space for computer training, childcare and drug counseling. These experiments carry a certain risk because public subsidy is usually not available for commercial spaces.

But most developers have forged ahead, confident they can find tenants for non-residential uses. In the process, they've become more creative in identifying potential construction sites.

When the century-old Ravenswood Hospital in Chicago was vacated recently, the local development firm Seay & Thomas Inc. proposed converting the facility into affordable housing — quite a switch, considering that Ravenswood is located in an upscale neighborhood surrounded by $800,000 Victorian mansions and medical offices. The financial details haven't been worked out yet, but the rehab of Ravenswood is likely to win approval.

Other towns also are jumping on the bandwagon. In Melrose Park, a suburb of Chicago, a run-down motel and adjacent restaurant were leveled to make way for a $50 million project combining both market-rate and affordable housing. The city kicked in nearly $6 million in tax abatements — enough to finance land acquisition and demolition work — for the developer, Illinois Development Services Corp., in return for a promise to make rents affordable.

“Without the affordable component, we wouldn't have gotten the tax breaks from the municipality,” says Anthony Bruno, president of the development firm. “And without the tax breaks, we probably couldn't have done anything to the site. That motel would still be there.”

Similar victories are being won throughout the U.S. What follows is a look at the profound impact of two affordable housing projects: Allapatta Garden Apartments and Santa Clara Apartments in Miami, and Hismen Hin-nu Terrace in Oakland, Calif.

Allapatta Garden Apartments and Santa Clara Apartments

When the 21-mile Miami-Dade Metro Rail was erected back in the 1980s, each of the 21 station stops was afforded a vast expanse of empty land to accommodate commuter parking. But the commuter traffic fell short of forecasts and the parking lots stood empty. Then in the mid-1990s, the Miami-Dade Transit Authority decided to offer much of the land for lease to enterprising developers. At Carlisle Group LLC in Miami, a developer of multifamily housing since 1996, a light bulb went on: Why not put up affordable housing adjacent to rail stations for people often too poor to own their own cars?

So far, Carlisle has two projects under construction. Allapatta Garden Apartments is located on a four-acre site in a residential neighborhood, and Santa Clara Apartments is situated on a 1.25-acre site in an area surrounded by hospitals and medical clinics. Allapatta, built at a cost of $10.9 million and expected to be complete in October, will include 128 units with rents as low as 33% of the area-wide median average rent, or $285. The complex also will include a clubhouse and day-care facility.

Financing sources included $5.2 million coming from the Miami-Dade Housing Authority and $3.7 million generated from the sale of tax credits. The city of Miami kicked in another $400,000. As its project fee, Carlisle is allowed to take a development fee equal to 16% of project cost, or about $1.7 million.

“The tax credits are the key,” says Luis Gonzalez, COO of Carlisle. “That drives the affordable housing formula. The credits allow us to build and even over-improve properties while keeping the rent affordable.”

Santa Clara, about two miles south of Alapatta, will feature 208 units built at a cost of $18.6 million when it is completed in September. Gonzalez anticipates that finding tenants will be no problem. “There is a lack of affordable housing around Miami. We expect both projects to lease up quickly,” he says, citing statistics that suggest Miami needs nearly 20,000 new affordable housing units to meet demand. “Many renters will be coming from substandard market-rate housing,” adds Gonzalez. “The access to the Metro line will be a big attraction for them.”

Of course, Miami-Dade Transit also stands to benefit when the projects are finished. Officials figure that the adjacent housing will boost ridership. As for the other 19 station stops, a variety of development has blossomed, ranging from office buildings to shopping centers to a 305-room Marriott Hotel at the Dadeland station that boasts a 96% occupancy rate, one of the highest in South Florida.

“We have let developers tell us what is most feasible for each site,” says Alberto Parjus, chief of the office of property development for Miami-Dade Transit. “Our preference is to see mixed uses, with office and retail and affordable housing. Affordable housing is a particularly good match because we think these people are likely to be transit users.”

Hismen Hin-nu Terrace, Oakland, Calif.

To many followers of the affordable housing industry, Hismen Hin-nu, a 92-unit complex built in 1995, has been a model that developers since have aspired to duplicate. A joint venture between two local non-profits, the East Bay Asian Local Development Corp. and the San Antonio Community Development Council, Hismen Hin-nu was erected on a 1 2/3-acre site occupied by a long-shuttered grocery store.

From the start, developers were careful to pay homage to the neighborhood's antecedents. The Hismen Hin-nu name, for instance, means Sun Gate in the language of the Muwekma Ohlone Indians who once occupied the land centuries ago.

Before he started to work on a design, architect Michael Pyatok met with neighborhood groups to obtain their opinions. He even held workshops with local residents who were allowed to construct models of what they wanted on the site.

“Zoning would have allowed a massive building with 150 residential units, but the neighbors clearly didn't want that,” Pyatok recalls. Instead he erected 3- and 4-story brick Mission Revival style buildings, atop ground-floor retail space housing a Head Start day-care center, a Dollar Store, a flea market and a police community relations office. Murals and other artwork commissioned with a grant from the National Endowment for the Arts accent the red-tile roofs, trellised balconies and warm-colored stucco.

The overall look of the project is the equal of market-rate housing in the area, which is no accident, according to the architect. “To make plain and adequate shelter into a great place typically requires an extra investment of 3% or 4%. If you have a $10 million project, therefore, by spending an extra $400,000 you can make it into something that will win awards,” Pyatok says.

“Not-for-profit groups are often able to raise the money to do that. It's the private developers (erecting market-rate housing) who are intent on maximizing profits, I find, who won't make the extra investment. They want more slimmed down buildings today,” adds Pyatok.

Land cost for Hismen Hin-nu was $1 million, with construction of the housing amounting to another $10.5 million, or about $85 per sq. ft. The commercial space cost $900,000, or $64 per sq. ft. The total development cost was $15.3 million.

To finance that, the developers got a $1.5 million deferred payment loan from the Oakland Redevelopment Agency, a $3.7 million deferred payment loan from the California Rental Housing Construction Program, a $1.2 million loan from the California Community Reinvestment Program and, finally, an $8.3 million construction loan from Wells Fargo Bank.

The housing, with monthly rents that range from $332 for one-bedroom units to $700 for four bedrooms, or less than 60% of the neighborhood median rent, has been full since opening day. The commercial space has been nearly as successful.

Joshua Simon, director of real estate development for East Bay Asian, observes a strong sense of community. “Having merchants on the ground floor of residential buildings is healthy for a neighborhood. Shop owners keep an eye on the apartments during the day while people are at work. The neighborhood feels safer to residents.”

The concept has been such a success, with a low turnover of tenants, that East Bay Asian is finishing up work on a second Oakland project, called Swans Market, combining 18 affordable apartments with 20 market-rate condominiums and a 42,000 sq. ft. office complex, along with three restaurants and a fresh-food market.

An even bigger project of 390 units, which includes a five-acre park, is currently under review by the Oakland Housing Authority. “We're becoming more and more comfortable with mixed-use developments like this,” Simon concludes.